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Monday, February 28, 2011

Social Security: The Notch Issue


Dawn Nuschler
Specialist in Income Security

Some Social Security beneficiaries who were born from 1917 to 1921—the so-called notch babies—believe they are not receiving fair Social Security benefits. (The Social Security Administration (SSA) and a 1994 commission on the notch issue define the notch period as 1917 to 1921, though some advocates define the period as 1917 to 1926.) The notch issue resulted from legislative changes to Social Security during the 1970s. The 1972 Amendments to the Social Security Act first established cost-of-living adjustments (COLAs) for Social Security. This change was intended to adjust benefits for inflation automatically, but an error caused benefits to rise substantially faster than inflation.

Congress corrected the error in the 1977 Amendments. However, benefits for those born from 1910 to 1916 were calculated using the flawed formula, giving them unintended windfall benefits. The notch babies, born from 1917 to 1921, became eligible for benefits during the period in which the corrected formula was phased in. For many who retired during in this phasein period, however, the transition formula did not lessen the differential between their benefits and the windfall benefits received by people born in earlier cohorts. Some notch babies feel it is unfair that their benefits are lower than those received by the older individuals who received the windfall, and also that the transition formula did not do enough to make up the difference.

A number of legislative attempts have been made over the years to give notch babies additional benefits, but none have been successful. A congressionally mandated commission studied the issue and concluded in its 1994 report that “benefits paid to those in the ‘Notch’ years are equitable, and no remedial legislation is in order.”

Any future change to the Social Security benefit formula has the potential to create a notch. This is an important consideration as lawmakers consider changes to ensure long-term system solvency.



Date of Report: February 11, 2011
Number of Pages: 9
Order Number: RS22678
Price: $19.95

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Contracting Programs for Alaska Native Corporations: Historical Development and Legal Authorities

Todd Garvey
Legislative Attorney

John R. Luckey
Legislative Attorney

Kate M. Manuel
Legislative Attorney


According to some reports, federal contract dollars awarded to Alaska Native Corporations (ANCs) and their subsidiaries increased by 916% between FY2000 and FY2008, going from $508.4 million to $5.2 billion. The dollars awarded to ANC-owned firms through the Small Business Administration’s (SBA’s) 8(a) Program, in particular, reportedly tripled between FY2004 ($1.1 billion) and FY2008 ($3.9 billion). This widely reported increase has generated congressional and public interest in the legal authorities governing contracting with these entities.

Federal agencies can presently contract with ANC or ANC-owned firms under various authorities. The identity of the procuring agency and the small business status of the ANC or ANC-owned firm determine, in part, which authority governs in particular circumstances. First, the Armed Services Procurement Act (ASPA) of 1947 and the Federal Property and Administrative Services Act (FPASA) of 1949, as amended, generally give defense and civilian agencies, respectively, broad authority to contract with any qualified, responsible source, including ANCs and ANCowned firms. These acts also authorize agencies to make sole-source awards to ANCs or ANCowned firms in certain circumstances (e.g., single source, unusual or compelling circumstances), although such sole-source awards must be justified in writing and approved by agency officials. Second, Section 15 of the Small Business Act of 1958 authorizes agencies to “set aside” contracts for small businesses by conducting competitions in which only they can compete. Section 15 does not, however, authorize sole-source awards. Third, Section 8(a) of the Small Business Act authorizes set-asides and sole-source awards to small businesses owned and controlled by socially and economically disadvantaged individuals or groups. Under Section 8(a), contracts valued in excess of $4 million ($6.5 million for manufacturing contracts) must be set aside for 8(a) firms and cannot be awarded noncompetitively unless (1) there is not a reasonable expectation that at least two eligible and responsible 8(a) firms will submit offers at a fair market price or (2) the SBA accepts the requirement on behalf of an 8(a) firm owned by an ANC, Indian tribe, or, in the case of Department of Defense (DOD) contracts, a Native Hawaiian Organization. Until 2009, such sole-source awards were not subject to justifications or approvals, unlike those under ASPA and FPASA. Fourth, Native American statutes provide for the payment of a 5% bonus to federal contractors that subcontract with ANCs; allow contracts with “large” ANCs to count toward federal prime contractors’ goals for subcontracting with small businesses; and provide that any size ANC counts as a disadvantaged business enterprise for certain transportation contracts. Fifth, various appropriations riders allow DOD to contract out functions performed by government employees to ANCs without going through the competitive sourcing process normally required.

The 111
th Congress enacted legislation (P.L. 111-84) requiring justifications and approvals for sole-source contracts in excess of $20 million awarded to ANC- or other group-owned firms through the 8(a) Program. Members of the 112th Congress have introduced legislation (H.R. 598, S. 236) that would generally subject ANC-owned firms participating in the 8(a) Program to the same treatment as individually owned firms. Among other things, this legislation would preclude ANC-owned firms from receiving sole-source awards valued in excess of $4 million ($6.5 million for manufacturing contracts) under the authority of Section 8(a) of the Small Business Act. SBA also promulgated a final rule on February 11, 2011, prohibiting ANC-owned firms from receiving a sole-source 8(a) contract that is a follow-on contract to an 8(a) contract that was performed immediately previously by another firm owned by the same ANC, as well as requiring ANCowned firms to report annually on the benefits provided to Alaska Natives through the ANC’s participation in the 8(a) Program. This rule would also make other changes affecting ANCs.


Date of Report: February 15, 2011
Number of Pages: 28
Order Number: R40855
Price: $29.95

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Compensated Work Sharing Arrangements (Short-Time Compensation) as an Alternative to Layoffs


Alison M. Shelton
Analyst in Income Security

Short-time compensation (STC) is a program within the federal-state unemployment compensation system. In the 20 states that operate STC programs, workers whose hours are reduced under a formal work sharing plan may be compensated with STC, which is a regular unemployment benefit that has been pro-rated for the partial work reduction.

Although the terms “work sharing” and “short-time compensation” are sometimes used interchangeably, the term “work sharing” refers to any arrangement under which workers’ hours are reduced in lieu of a layoff. Under a work sharing arrangement, a firm faced with the need to downsize temporarily chooses to reduce work hours across the board for all workers instead of laying off a smaller number of workers. For example, an employer might reduce the work hours of the entire workforce by 20%, from five to four days a week, in lieu of laying off 20% of the workforce.

Employers have used STC combined with work sharing arrangements to reduce labor costs, sustain morale compared to layoffs, and retain highly skilled workers. Work sharing can also reduce employers’ recruitment and training costs by eliminating the need to recruit new employees when business improves. On the employee’s side, work sharing spreads more moderate earnings reductions across more employees—especially if work sharing is combined with STC—as opposed to imposing significant hardship on a few. Many states also require that employers who participate in STC programs continue to provide health insurance and retirement benefits to work sharing employees as if they were working a full schedule.

Work sharing and STC cannot, however, avert layoffs or plant closings if a company’s financial situation is dire. In addition, some employers may choose not to adopt work sharing because laying off workers may be a less expensive alternative. This may be the case for firms whose production technologies make it expensive or impossible to shorten the work week. For other firms, it may be cheaper to lay off workers than to continue paying health and pension benefits on a full-time equivalent basis. Work sharing arrangements in general also redistribute the burden of unemployment from younger to older employees, and for this reason they may be opposed by workers with seniority who are less likely to be laid off.

From the perspective of state governments, concerns about the STC program have included the program’s high administrative costs. Massachusetts has made significant strides in automating STC systems and reducing costs, but other states still manage much of the STC program on paper.

Currently, only 20 states operate STC programs to support work sharing arrangements. Three of the 20 STC states—Colorado, New Hampshire, and Oklahoma—enacted their STC programs in 2010. Through the end of 2008, the STC program rarely reached 1% of unemployment benefits paid annually across the United States. This ratio was 2% in 2009 and 1.2% in 2010. The reasons for low state and employer take-up of the STC program are not completely clear, but a key cause would appear to be ambiguity in the 1992 federal law that authorizes STC. Because of this ambiguity, the U.S. Department of Labor (DOL) has not provided guidance or technical assistance on STC to the states since 1992. A more active public policy would require either DOL reinterpretation of the 1992 law or congressional action to either clarify federal law or give the Secretary of Labor authority to determine needed additional provisions.

The President’s budget for FY2012 would provide temporary federal financing of work sharing benefits and would encourage states to adopt and expand their use of the program, at an estimated cost of $641 million from 2012 to 2021.



Date of Report: February 15, 2011
Number of Pages: 22
Order Number: R40689
Price: $29.95

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Tax Credit Bonds: Overview and Analysis

Steven Maguire
Specialist in Public Finance

Almost all state and local governments sell bonds to finance public projects and certain qualified private activities. Most of the bonds issued are tax-exempt bonds because the interest payments are not included in the bondholder’s (purchaser’s) federal taxable income. In contrast, Tax Credit Bonds (TCBs) are a type of bond that offers the holder a federal tax credit instead of interest. This report explains the tax credit mechanism and describes the market for the bonds.

There are a variety of TCBs. Qualified zone academy bonds (QZABs), which were the first tax credit bonds, were introduced as part of the Taxpayer Relief Act of 1997 (P.L. 105-34) and were first available in 1998. Clean renewable energy bonds (CREBs) were created by the Energy Policy Act of 2005 (P.L. 109-58) and “new” CREBs by the Emergency Economic Stabilization Act of 2008 (EESA P.L. 110-343). Gulf tax credit bonds (GTCBs) were created by the Gulf Opportunity Zone Act of 2005 (P.L. 109-135). Authority to issue GTCBs has expired. Qualified forestry conservation bonds (QFCBs) were created by the Food, Conservation, and Energy Act of 2008 (P.L. 110-246). Qualified energy conservation bonds (QECBs) and Midwest Disaster Bonds (MWDBs) were created by the Emergency Economic Stabilization Act of 2008 (P.L. 110-343).

The American Recovery and Reinvestment Act of 2009 (P.L. 111-5, ARRA) included several bond provisions that use a tax credit mechanism. Specifically, ARRA created Qualified School Constructions Bonds (QSCBs) and a new type of bond that allows issuers the option of receiving a federal payment instead of allowing a federal tax exemption on the interest payments. These new bonds, Build America Bonds (BABs) and Recovery Zone Economic Development Bonds (RZEDBs), are also unlike other tax credit bonds in that the interest rate on the bonds is a rate agreed to by the issuer and investor. In contrast, the Secretary of the Treasury sets the credit rate for the other TCBs. The authority to issue BABs and RZEDBs expired after 2010.

Each TCB, with the exception of BABs, is designated for a specific purpose or project. Issuers use the proceeds for public school construction and renovation; clean renewable energy projects; refinancing of outstanding government debt in regions affected by natural disasters; conservation of forest land; investment in energy conservation; and for economic development purposes.

All of the TCBs are temporary tax provisions. The QZAB and QSCB credit rate is set at 100% and the new CREB and QECB credit rate is set at 70% of the interest cost. In contrast, the BAB tax credit rate is 35%. There were several bills introduced in the 111
th Congress that would have extended all of the tax credit bond programs including BABs. Only QZABs were extended for the 2011 tax year with $400 million of capacity (P.L. 111-312).

In the FY2011 budget, the Obama Administration has proposed extending the BAB program at a lower direct payment credit rate of 28%. The reduced credit rate is intended to minimize the cost to the Treasury.



Date of Report: February 11, 2011
Number of Pages: 16
Order Number: R40523
Price: $29.95

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Friday, February 18, 2011

Faith-Based Funding: Legal Issues Associated with Religious Organizations That Receive Public Funds

Cynthia Brougher
Legislative Attorney

Beginning in 1996, Congress enacted several pieces of legislation that included provisions that have become known as charitable choice rules. Included in legislation for various federally funded social service programs, charitable choice rules were aimed at ensuring that faith-based organizations could participate in federally funded social service programs like other nongovernmental providers. The rules allow religious organizations to receive public funding to offer social services without abandoning their religious character or infringing on the religious freedom of program beneficiaries. No new legislation has been enacted since 2000, but Congress continues to consider the issues associated with charitable choice as the related programs are reauthorized.

Much of the controversy that has surrounded these programs has centered on the constitutionality of the federal government funding faith-based social service programs and so-called religious hiring rights, the term often used to refer to religious organizations’ selectivity in employment decisions. Supporters of faith-based funding argue that religious organizations have a constitutional right to retain their preferences for co-religionists in hiring as a matter of religious identity and exercise. Opponents argue that allowing organizations that receive public funding to discriminate based on religion violates principles of neutrality guaranteed by the U.S. Constitution.

Challenges to programs with funding to religious organizations under charitable choice have had varying results. Supreme Court jurisprudence has shifted over the last decade, which has in some cases lowered the constitutional barriers for aid to religious organizations. However, some cases have indicated that the Court may not favor aid in particular cases of providing funding to religious organizations.

This report will briefly discuss the history of charitable choice provisions and the implementation of the Faith-Based Initiative which extended similar rules to certain executive agencies. It will also analyze the constitutional issues associated with funding faith-based organizations, services, and programs, including the distinction of financial assistance provided directly and indirectly to religious organizations. The report will also detail the legal protections for religious organizations that receive funds under these programs and for the beneficiaries of the services they provide, with particular focus on civil rights and discrimination prohibitions in current law. Finally, the report will analyze who is able to raise judicial challenges to publicly funded faith-based programs and how such lawsuits have been resolved.



Date of Report: February 9, 2011
Number of Pages: 18
Order Number: R41099
Price: $29.95

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Federal Government Assistance for American International Group (AIG)


Baird Webel
Specialist in Financial Economics

In the beginning of 2008, American International Group (AIG) was one of the world’s largest insurers, generally considered to be financially sound with an AA credit rating. By the end of the year, it was near bankruptcy and had been forced to seek up to $173.4 billion in financial assistance from the U.S. government. The CEO had been replaced at the government’s behest, executive compensation was under limits, and shareholders in AIG saw their equity diluted by a new 79.9% stake held by the government. The overarching AIG holding company was regulated by the Office of Thrift Supervision (OTS), but because the company was primarily an insurer, it was largely outside of the normal Federal Reserve (Fed) facilities that lend to thrifts facing liquidity difficulties. AIG was also outside of the normal receivership provisions that apply to banking institutions. Had AIG not been effectively deemed “too big to fail” and given assistance by the government, bankruptcy seemed a near certainty in September 2008.

The losses that led to AIG’s essential failure resulted largely from two sources: the state-regulated AIG insurance subsidiaries’ securities lending program and the AIG Financial Products (AIGFP) subsidiary, a largely unregulated subsidiary that specialized in financial derivatives. The transactions that led to the immediate losses were dealt with relatively quickly in 2008, albeit with significant outlay of government funds. Although the securities lending program was relatively straightforward to discontinue, the AIGFP derivative operations extended well beyond the transactions that caused the immediate losses and have taken longer to wind down. AIG reported approximately $500 billion in notional net value of derivatives as of September 2010, down from approximately $2 trillion in September 2008.

The government assistance to AIG has been largely ad hoc. It began with an $85 billion loan from the Fed in September 2008. This loan was on relatively onerous terms with a high interest rate and required a handover of 79.9% of the equity in AIG to the government. As AIG’s financial position weakened, several rounds of additional funding were provided to AIG and the terms were loosened to some degree. The Fed assistance has been successively replaced with assistance from the Treasury through the Troubled Asset Relief Program (TARP). Under a restructuring finalized on January 14, 2011, the Treasury now holds 92.1% of the common equity in AIG, which would be worth approximately $67 billion if they could be sold at market prices from the end of January. In addition, the Treasury holds subsidiary equity interests worth approximately $20.3 billion. Funds disbursed under TARP as of January 31, 2011, total $67.8 billion with the possibility of another $2 billion at AIG’s discretion. Current Fed involvement consists solely of $26.2 billion to be repaid to the Fed by Maiden Lane II and Maiden Lane III, two limited liability corporations (LLCs) that served as Fed vehicles to purchase troubled assets from AIG during the crisis. As of February 2, 2011, the Fed would also see $3.5 billion in capital gains from these LLCs.

Congress has held several hearings specifically focusing on the intervention in AIG. Congressional attention and anger has been focused on perceived corporate profligacy, particularly bonuses for AIG employees. Bills in the 111
th Congress that would have placed specific taxes on or otherwise restricted such bonuses included H.R. 1586, passed by the House on March 19, 2009; S. 651, introduced on the same day; and H.R. 1664, passed by the House on April 1, 2009. The 112th Congress has not advanced legislation or held hearings focused specifically on the AIG intervention.


Date of Report: February 10, 2011
Number of Pages: 21
Order Number: R40438
Price: $29.95

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